IRS shifts its audit focus to partnerships and other pass-through entities

The Internal Revenue Service is shifting its small-business audit focus “from corporations to various types of partnerships as those entities have grown more prevalent and complex,” according to this Bloomberg story.Examining the returns from partnerships and other so-called pass-throughs will be the “top priority” of the IRS's Small Business/Self-Employed Division over the next year and beyond, says Faris Fink, head of the office. As part of that shift, more and better training of IRS agents is needed, Mr. Fink said at the American Institute of CPAs National Tax Conference last week in Washington, according to Bloomberg.The IRS “has for a long time focused its energy on corporations,” he said. “Frankly, we're a little bit behind the curve in getting around to developing a partnership strategy.”The news service notes that pass-throughs, which include S corporations and sole proprietorships, are businesses that don't pay income taxes directly. Instead, “their income is passed through to their owners who pay taxes on it on their individual returns,” Bloomberg reports. Pass-throughs comprise almost 95% of all U.S. business entities, IRS statistics show.But from 2007 to 2011, the number of partnerships grew by 15.3%, and they now constitute a significant percentage of returns for both IRS's small business division and the Large Business & International Division, Mr. Fink said.From there, things get complicated. The IRS now sees partnerships with 82,000 partners and structures ranging from 125 to 182 tiers, Mr. Fink said.“Frankly, our training was not geared for dealing with those types of large, complex partnerships,” he said. “Historically, we would think of a partnership of having, say, 10 partners” with a limited number of tiers.At the conference, Mr. Fink also said taxpayers and tax practitioners should be able to access information more easily from the IRS's multiyear National Research Program, which Bloomberg said “randomly selects a certain number of returns over several years to track new areas of taxpayer noncompliance and to develop better strategies for audits.”

This and that

A good boss: Your kids might enjoy “SpongeBob SquarePants.” (Mine sure did when he was younger.) But did you know the show offers some valuable lessons in employment law?Jon Hyman, a partner in the Labor & Employment group of Cleveland law firm Kohrman Jackson & Krantz, on Workforce.com argues that SpongeBob's employer — Eugene Krabs, owner of The Krusty Krab restaurant — deserves credit for “bringing the plight of the unpaid intern to the forefront of pop culture.”

The story begins, Mr. Hyman notes, “with Mr. Krabs firing SpongeBob from his fry-cook job at The Krusty Krab to save a whole five cents by not paying his wage. Minimum wage be damned, SpongeBob offers to work for free to keep his job. Amazingly, the historically cheap Krabs turns him down, telling SpongeBob that he already looked into it, and it's illegal to let employees work for free.”The lesson: “Unless you meet the very limited test for an unpaid intern, if you have employees, you must pay them,” Mr. Hyman writes. “Employees are not allowed to volunteer their time or work for free.”See how it grows:Fast Companyexamines the soon-to-rise BioCellar in East Cleveland, the brainchild of local biologist Jean Loria, who will use the basement of a vacant house and top it with a greenhouse so crops can grow inside."We're turning it into a place for the community to come together and have access to urban agriculture," Rob Donaldson, the architect who designed the greenhouse, tells Fast Company. "We want to turn vacant structures into a community asset."(You can read a Sept. 3 Crain's story about the BioCellar, by Kathy Ames Carr, here.For its national audience, Fast Company notes that at depths below four feet, “the ground stays at a constant temperature, so even in the middle of a harsh Cleveland winter, the room won't get colder than 50 degrees. With light flooding in from the glass roof above, food can grow year round.”The BioCellar will run off the grid, with solar panels on the roof, a passive ventilation system, and possibly geothermal heat, according to the story.While the food can be sold locally, the project's main purpose “is to improve the neighborhood and provide jobs,” Fast Company says.From the story:

Former prison inmates are building the greenhouse, while learning construction skills. They'll have the opportunity to grow food there as well, thanks to Mansfield Frazier, one of the leaders of the project. Frazier, who runs the nonprofit Neighborhood Solutions, also owns a vineyard on a former vacant lot next door to the BioCellar. Chateau Hough, named after the neighborhood he hopes will soon see better days, just had its fourth growing season, and Frazier hopes the BioCellar will have similar success.“All of what we do is wealth creation, and we have to grow what we can grow for the highest dollar amount," Frazier says. "Shiitake mushrooms are $12 a pound."Results may vary: The financial world last week was all atwitter about the IPO of Twitter. Small businesses, though, aren't quite as sold on the social media darling.For instance, Justin Beegel, president of Infographic World Inc., tells The Wall Street Journal that he spent $550 to advertise his 11-person New York data-visualization company on Twitter in September. But two weeks of "promoted tweets" offering a discount to targeted users generated only one response, from a user who didn't become a customer."I'm definitely done with the Twitter ads," Mr. Beegel says.While other small business owners have had better results, the story notes, “analysts, advisers and Twitter executives themselves say that cultivating and reaching an audience on the short-message service can require more time and effort than many small business owners feel they can afford.”Richard Alfonsi, Twitter's vice president of global online sales, tells the newspaper, “I would say a couple days or a couple weeks are not enough" time to learn how to use Twitter and measure results. “You have to think about planning for the long term."Small businesses, it turns out, are a challenge for social media companies other than Twitter."It's really hard to get small businesses to use technological products," Facebook Inc.'s chief operating officer, Sheryl Sandberg, told analysts last week.You also can follow me on Twitter for more news about business and Northeast Ohio.

Morning Roundup

Business headlines from Crain's Cleveland Business and other Ohio newspapers — delivered FREE to your inbox every morning. Sign up for the Morning Newsletter.